Do You Pay Spec Fees?Avoiding Conflicts of Interest by Michael Collins

Would you offer a lavish gift in hopes of turning up in
an architect’s spec? If you say no, others are saying yes. In recent months
I’ve encountered stories from several manufacturers in the industry regarding
architects and specification fees, or “spec fees.” These are fees given
to an architect by a building product manufacturer. They are paid in exchange
for the architect specifying the manufacturer’s products on, typically,
a commercial or high-end residential project. Such product specifications
usually bear the “no equal” qualifier. This means the specified manufacturer’s
product must be used and no substitute will be accepted. That type of
spec is appropriate if it generates from the architect’s genuine belief
that the specified product is without peer and is the optimal solution
for the project at hand. The problem arises, however, when the architect
has essentially offered for sale the highest opinion he can pronounce
on a building product.

Spotting Spec Fees
These spec fees can consist of readily identifiable items, such as cash
or gold watches. They can also come in a form that makes it difficult
to differentiate from thorough professional due diligence. For example,
if an architect is flown to the Bahamas to inspect a manufacturer’s doors
or windows in the field, who would know whether they could have inspected
a similar product installation in their own city? Such trips can represent
a soft spec fee and can lead to conflicts of interest.

The notion of a “conflict of interest” as a legal term is relatively new.
According to a 2009 study by Michael Davis and Josephine Johnston, it
was in 1949 that “conflict of interest” made its first appearance in a
court case involving its modern meaning. Ten more years passed until any
federal legislation addressed the term and its meaning. Two key legal
dictionaries did not carry entries regarding conflicts of interest until
1967 and 1979. While they have only appeared in the legal lexicon in the
past 40 years, conflicts of interest are relatively easy to spot. Like
a beautiful piece of art, you know one when you see it. If one examines
the economic transactions taking place in a given situation and is left
feeling that it would be difficult to faithfully execute one’s obligations
to all stakeholders, a conflict of interest most likely exists.

Condoning Conflicts of Interest
The National Council of Architectural Registration Boards (NCARB) and
the American Institute of Architects have made their position on conflicts
of interest very clear. The rules of conduct of both organizations state
that conflicts of interest should be avoided whenever possible and must
be fully disclosed when they cannot reasonably be avoided. More to the
point, the NCARB rules state that an architect “shall not accept compensation
for services from more than one party on a project unless the circumstances
are fully disclosed to and agreed to … by all parties.” The concept behind
such disclosure is that if the client is aware of the potential conflict
and still proceeds, buyer beware is the controlling rule.

Everyone involved in a building project, especially the client, assumes
that the architect’s loyalty is staunchly to the primary client compensating
them. If this trust erodes, consumer confidence will deteriorate quickly,
adding mistrust and inefficiencies to the building process. Who among
us wouldn’t question an architect’s specification of a given product with
no possible substitutions if we knew the architect had received lavish
perks from the manufacturer of that product?

As in most professions, the vast majority of architects likely would refuse
to accept a spec fee or similar kickback from a manufacturer. The fact
that some of them are doing so, however, suggests that others might or
will. There is a particularly high risk because the slowdown in construction
has directly impacted architects’ revenues. It is incumbent on architects
to adhere to the clear and firm rules put forth by their professional
organizations—that conflicts of interest must be avoided or disclosed
fully. Manufacturers must refuse to take part in such payments and should
probably sever ties with architects that demand them.

There is no job or series of jobs worth allowing the fabric of trust in
this industry to be twisted and torn. Left unchecked, spec fees would
become a race to the bottom in which every industry participant’s integrity
would be questioned by consumers. We owe it to ourselves to adhere to
time-honored standards of conduct so this will remain an industry of which
we can be proud.

Michael Collins is a Chicago-based investment banker
with a specialized merger and acquisition practice in the door and window
industry.